US govt sues Bank of America for defrauding investors prior to housing crash

The US government has filed two lawsuits against Bank of America accusing the company of defrauding investors by massively underestimating the quality of mortgage-backed securities prior to the 2008 housing market crash and US recession.

The US Security Exchange Commission (SEC) and Justice Department
each filed a lawsuit in US District Court in Charlotte, North
Carolina on Tuesday, accusing Bank of America of knowingly
minimizing the risk associated with $850 million worth of
securities backed by residential mortgages.

“I applaud Attorney General Holder for taking this important
step toward holding Bank of America accountable for packaging and
selling toxic loans to investors and brokers, a key cause of the
housing collapse that crashed our economy and still plagues
communities to this day,” New York Attorney General Eric
Schneidermann said in a statement.

US President Barack Obama has promised to hold Wall Street
accountable for corruption and malfeasance which took place
during the housing boom. Attorney General Eric Holder said the
lawsuit is “the latest step forward in the Justice Department’s
ongoing efforts to hold accountable those who engage in
fraudulent or irresponsible conduct.”

Bank of America said it was expecting the lawsuit in a corporate
filing last week, according to The New York Times.

The Justice Department lawsuit claims an “unprecedented
portion” of the mortgages originated with brokers
unaffiliated with the bank. Then-CEO Ken Lewis, the suit says,
referred to the so-called wholesale loans as “toxic
waste.”

Prosecutors say that while Bank of America assembled securities
in 2008, employees were pressured to process as many mortgage
evaluations as possible in order to maximize profits. More than
40 per cent of the mortgages did not meet the underwriting
qualifications and were summarily ignored.

According to the lawsuit, one employee said her job was to
“basically validate the loans” instead of reviewing them
to find any potential flaws. Upon raising the issue with her
superiors, she was told to “keep her opinions to herself,”
prosecutors said.

The two suits accuse Bank of America - which has over 260,000
employees across the world - of lying to investors and failing to
disclose essential information. A Justice Department statement
declared that a “material number” of mortgages “failed
to materially adhere to Bank of America’s underwriting
standards.”

Bank of America stock shares fell by one per cent after the news
broke, but have increased by 97 per cent over the past year. In a
statement released Tuesday, the company denied the transactions
were tainted in any way.

“These were prime mortgages sold to sophisticated investors
who had ample access to the underlying data, and we will
demonstrate that,” the statement said.

“The loans in this pool performed better than loans with
similar characteristics originated and securitized at the same
time by other financial institutions. We are not responsible for
the housing market collapse that caused mortgage loans to default
at unprecedented rates and these securities to lose value as a
result.”